Your company has been approached to bid on a contract to sell 20,000 voice recognition (VR computer keyboards per year for four years. Due to technological improvements, beyond tha time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3,400,000 and will be depreciated on a straight-line basis to a zerc salvage value. Production will require an investment in net working capital of $110,000 to be returned at the end of the project, and the equipment can be sold for $230,000 at the end of production. Fixed costs are $765,000 per year and variable costs are $37 per unit. In addition to the contract, you feel your company can sell 4,000, 11,600, 13,600, and 6,900 additional units to companies in other countries over the next four years, respectively, at a price of $130. This price is fixed. The tax rate is 22 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $150,000. What bid price should you set for the contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) HURCHAELDORAIMOLANAN Bid price
Your company has been approached to bid on a contract to sell 20,000 voice recognition (VR computer keyboards per year for four years. Due to technological improvements, beyond tha time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3,400,000 and will be depreciated on a straight-line basis to a zerc salvage value. Production will require an investment in net working capital of $110,000 to be returned at the end of the project, and the equipment can be sold for $230,000 at the end of production. Fixed costs are $765,000 per year and variable costs are $37 per unit. In addition to the contract, you feel your company can sell 4,000, 11,600, 13,600, and 6,900 additional units to companies in other countries over the next four years, respectively, at a price of $130. This price is fixed. The tax rate is 22 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $150,000. What bid price should you set for the contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) HURCHAELDORAIMOLANAN Bid price
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Your company has been approached to bid on a contract to sell 20,000 voice recognition (VR)
computer keyboards per year for four years. Due to technological improvements, beyond that
time they will be outdated and no sales will be possible. The equipment necessary for the
production will cost $3,400,000 and will be depreciated on a straight-line basis to a zero
salvage value. Production will require an investment in net working capital of $110,000 to be
returned at the end of the project, and the equipment can be sold for $230,000 at the end of
production. Fixed costs are $765,000 per year and variable costs are $37 per unit. In addition
to the contract, you feel your company can sell 4,000, 11,600, 13,600, and 6,900 additional
units to companies in other countries over the next four years, respectively, at a price of $130.
This price is fixed. The tax rate is 22 percent, and the required return is 12 percent.
Additionally, the president of the company will undertake the project only if it has an NPV of
$150,000.
What bid price should you set for the contract? (Do not round intermediate calculations and
round your answer to 2 decimal places, e.g., 32.16.)
Bid price
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Step 1: Concept.
VIEWStep 2: Computation of Present value of tax savings on depreciation.
VIEWStep 3: Computation of Present value of cash inflows from sale of additional units.
VIEWStep 4: Computation of Present value of cash inflow from sale of contracted keyboards.
VIEWStep 5: Computation of Present value of cash inflow due to recovery of working capital.
VIEWStep 6: Computation of Present value of cash inflow due to sale of equipment.
VIEWStep 7: Computation of bid price.
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